Midcap mutual funds invest in mid-sized companies that fall between large caps and small caps on the market capitalization scale. The midcap mutual funds have become an important part of investors’ portfolios over the years. They offer significant advantages that make them attractive investment avenues across market cycles. This blog discusses five major benefits of parking money in midcap mutual fund schemes.
Greater Growth Potential
Midcap companies are in the growth phase of their lifecycle. Most midcaps steadily strengthen their presence starting from a small base before potentially evolving into large caps over time. Investing in them during this high growth period leaves room for significant capital appreciation. Since midcaps are more flexible due to their smaller size, they can grab new opportunities faster. Their improving profitability also makes midcap stocks valuation rich. Funds that actively scout for quality midcaps across sectors are better poised to ride their expansion momentum. This makes midcap funds among the best avenues to earn higher returns relative to large caps in the long run.
Prudent Risk Profile
While small caps carry higher volatility, large caps offer limited upside due to their stability. Midcaps strike the right balance between risk and return for investors with moderate risk appetite. Midcap companies have survived the initial years and grown past teething troubles that small caps face. So, business risks are reduced. But their smaller scale still promises them longer runways for rapid growth unlike large caps. This sweet spot makes midcap funds a judicious choice to generate inflation-beating returns without taking undue risks. Their risk-return tradeoff is appealing especially in uncertain markets.
Increased Diversification
Midcap mutual funds provide much needed diversification to investor portfolios heavy on large caps. A prudent split between large, mid, and small cap funds allows managing risks better through allocation across market capitalization segments. Within midcaps also, funds that spread investments across sectors and companies mitigate concentration risks. This expansive exposure helps stabilize overall returns, contain downsides during market drops and better manage liquidity needs. From optimal asset allocation perspectives, midcap funds diversify portfolios.
Tax Efficiency
Midcap funds enhance tax efficiency due to lower portfolio churn relative to small caps. Fund managers allow their winners among midcap picks to ride longer without booking profits. This results in lower realized gains and dividends from these funds. So, investors save on taxes and earn more post-tax returns in addition to benefitting from compounding. These tax savings accumulate and make midcap funds a tax-friendly instrument in the long haul.
Participate in India’s Growth Story
An overweight allocation to midcaps allows investors to ride domestic consumption and manufacturing sectors better. Several midcaps cater to local demand through solutions tailored for Indian consumers across sectors. As indicators like per capita income and median age point to the India growth story still being in early stages, midcaps are geared to tap into economic tailwinds. Investors can gain from the coming decade’s prosperity through higher exposure to midcap funds rather than just large cap ones heavy on exporters.
Conclusion
Midcap funds offer India’s growing middle class a balanced avenue for accumulating long term wealth while participating in local growth drivers. Midcap companies themselves benefit from the expansion momentum to potentially turn into large caps over time. For investors, this translates to superior risk-adjusted returns not consistently visible in small or large cap funds in isolation. Though past performance is no guarantee of future returns, midcaps have shown such secular outperformance over long periods. Also, know what is aum in mutual fund. Higher AUM means fund is stronger and will attract more investors. So, parking a share of savings in midcap funds may prove to be a rewarding decision over investment horizons of 5+ years for goals like retirement, children’s education and wealth creation.
Anantha Nageswaran is the chief editor and writer at TheBusinessBlaze.com. He specialises in business, finance, insurance, loan investment topics. With a strong background in business-finance and a passion for demystifying complex concepts, Anantha brings a unique perspective to his writing.
